Europe's leaders are offering short-term patches for a long-term crisis.

Continental Europe is again hogging the headlines, but at least they divert attention from the sorry state of the UK economy.

The 19th EU summit in two years went some way to calm market fears over the euro’s future. It’s clear leaders want union and euro to remain. The difficulty is agreeing how to ensure that happens.

Alistair Cotton of Currencies Directsays the solution to the crisis lies in “clear and committed policies towards further federalisation of Europe. The deadlock seems to be which of the steps comes first: political or banking union”.

A major step was the decision to put private-sector debt in the form of bonds on the same footing as official loans from the EU’s bailout funds. Private bondholders were worried they could be forced to take cuts as happened during the Greek crisis. These fears have pushed yields on Spanish

As World First’s chief economist Jeremy Cook points out, it was vital that EU loans to Spain didn’t have seniority over other debts so bondholders did not “flee Spanish debt for fear of haircuts”. What are really needed are eurobonds, rather than bonds issued by individual countries within the region, but Germany’s Angela Merkel had made it clear that would only happen over her dead body.

So it’s back to short-term patches for a long-term crisis. As David Kerns of Moneycorp says: “The best bet for a longer-lasting solution is to mutualise some of the debt by issuing eurobonds.

“But Chancellor Merkel is adamant that she will block any such move, and with most Germans sharing this tough stance, she has left herself no room to manoeuvre.”

If the interest rate on the southern European countries’ debts come down as a result, there can be moves towards a closer union.

“A banking union will help soothe the internal issue of flight to quality,” says Chris Towner of HiFX, “as Germany soaks up all the cash deposits within the eurozone adding to the pressures faced by the peripheral banks, and would certainly restore confidence.”

The problem has always been balancing liabilities taken on by the whole eurozone with controls over national budgets. Naturally, euro countries are nervous of handing over financial control, although summit leaders did agree to a joint banking supervisory body for the eurozone. They unveiled proposals for a European treasury, to have powers over national budgets, as part of a 10-year plan to prevent future crises in the eurozone.

Long-term, structural solutions are needed to keep the euro alive. Michael Derks of FxPro believes: “If the euro is to survive, Spain and Italy must undertake huge structural reform, and Germany and international creditors need to provide the sovereigns with large, very long-term zero interest rate loans to give them time to restructure… even this might not be enough. All of this will continue to help sterling vis-à-vis the euro… we could see the euro worth 75p before year-end, despite the rancid state of the economy.”

Cook thinks sterling is likely to see gains against not only the euro but also the “weakened commodity and risk currencies” of New Zealand, Australia, South Africa and Canada. But he thinks it will fall against the US dollar and the yen. And Cotton believes the pound will stay up as long as investors avoid euro debt.

But not everyone agrees. Stephen Hughes, of Currencies.co.uk, thinks our close trade ties with Europe will “ultimately impact negatively on sterling’s long- term prospects”, while Josh Ferry Woodard, of TorFX, thinks the pound could take a knock soon.

“The imminent increase in the Bank of England’s quantitative easing target, plus the added threat of a rate cut could prove to be just what markets need to punish the pound,” he says.